Chapter 7: USING TECHNOLOGY LICENSING AND JOINT VENTURES

In This Chapter

Methods of obtaining foreign trade income

Advantages and disadvantages of technology licensing and joint ventures

You should consider two alternative ways of obtaining international sales income: technology licensing and joint ventures. Although not necessarily the most profitable forms of exporting, they do offer certain advantages, particularly for small and medium-sized businesses.

TECHNOLOGY LICENSING

Technology licensing is a contractual arrangement in which the licenser’s patents, trademarks, service marks, copyrights, trade secrets, or other intellectual property may be sold or made available to a licensee for compensation that is negotiated in advance between the parties. This compensation may be a lump-sum royalty, a running royalty (royalty that is based on volume of production), or a combination of both. U.S. companies frequently license their technology to foreign companies that then use it to manufacture and sell products in a country or group of countries defined in the licensing agreement.

A technology licensing agreement usually enables your firm to enter a foreign market quickly, and it poses fewer financial and legal risks than owning and operating a foreign manufacturing facility or participating in an overseas joint venture. Licensing also permits U.S. firms to overcome many of the tariff and non-tariff barriers that frequently hamper the export of U.S.-manufactured products. For these reasons, licensing can be a particularly attractive method of “exporting” for small companies or companies with little international trade experience, even though small and large firms profitably use this technique. Technology licensing may also be used to acquire foreign technology through cross-licensing agreements or grant back clauses that award rights to improved technology developed by a licensee. Seek legal advice to determine liability where licensing is involved.

Technology licensing is not limited to the manufacturing sector. Franchising is also an important form of technology licensing used by many service industries (see Box 7.1). In franchising, the franchiser (licenser) permits the franchisee (licensee) to use its trademark or service mark in a contractually specified manner for the marketing of goods or services. The franchiser usually continues to support the operation of the franchisee’s business by providing advertising, accounting, training, and related services. In many instances, the franchiser also supplies products needed by the franchisee.

Franchising is not the exclusive domain of well-known brands. Scores of new franchising concepts are converted into profitable businesses every year, and the majorities are created in the United States. Among recent franchising concepts that have gone global are personal fitness, flowers and candy, and elder care. Many of the franchises are being created especially for entrepreneurs in developing countries and feature relatively affordable license fees and other inputs. Attending the International Franchise Association convention and trade fair is a good way to learn about trends and new franchising concepts. For information, visit www.franchise.org/.

As a form of “exporting,” technology licensing has certain potential drawbacks. One negative aspect of licensing is that your control over the technology is weakened because it has been transferred to an unaffiliated firm. Additionally, licensing usually produces fewer profits for your company than exporting actual goods or services. In certain developing countries, there also may be problems in adequately protecting the licensed technology from unauthorized use by third parties (see Box 7.2).

You should make sure to register your patents and trademarks in this country. Copyright is recognized globally, but your patents and trademarks are territorial, meaning that rights are defined and interpreted differently. For this reason, you need to file your patents and trademarks with each country you intend to do business in. An exception is the European Union (EU), because its laws apply to all members. The Patent Cooperative Treaty and the Madrid Protocol allow you to register your patents and trademarks in your home country and apply for protection in the EU as well as in specific countries throughout the world. For more information and instructions for applying, visit www.stopfakes.gov and www.uspto.gov.

In considering the licensing of technology, remember that foreign licensees may attempt to use the licensed technology to manufacture products in direct competition with the licenser or its other licensees. In many instances, U.S. licensers may wish to impose territorial restrictions on their foreign licensees, depending on U.S. and foreign antitrust laws as well as the licensing laws of the host country. Also, U.S. and foreign patent, trademark, and copyright laws can often be used to bar unauthorized sales by foreign licensees, provided that the U.S. licenser has valid patent, trademark, or copyright protection in the United States or the other countries.

Many countries, particularly the 27 member states of the European Union, also have strict antitrust laws that affect technology licensing. The European Union has issued a detailed regulation, known as the block exemption regulation, governing patent and know-how licensing agreements as well as design and model rights and software copyright licenses. The block exemption regulation is Commission Regulation (EC) No. 772/2004 of April 27, 2004, and deals with the application of article 81(3) of the Treaty of Rome to categories of technology transfer agreements. If you are currently licensing or contemplating licensing technology to the European Union, you should carefully consider the regulation.

Because of the potential complexity of international technology licensing agreements, your company should seek qualified legal advice in the United States before entering into such an agreement.

In many instances, U.S. licensers should also retain qualified legal counsel in the host country in order to obtain advice on applicable local laws and to receive assistance in securing the foreign government’s approval of the agreement. Sound legal advice and thorough investigation of the prospective licensee and the host country will increase the likelihood that your licensing agreement will be a profitable transaction.

JOINT VENTURES

In some cases, joint ventures provide the best partner like manner of obtaining foreign trade income. International joint ventures are used in a wide variety of manufacturing, mining, and service industries, and they frequently involve technology licensing by the U.S. company to the joint venture.

Host country laws may require that a certain percentage (often 51 percent or more) of manufacturing or mining operations be owned by nationals of that country, thereby limiting U.S. companies’ local participation to minority shares of joint ventures. Despite such legal requirements, as a U.S. firm you may find it desirable to enter into a joint venture with a foreign firm to help spread the high costs and risks frequently associated with foreign operations. The local partner will likely bring to the joint venture its knowledge of the customs and tastes of local consumers, an established distribution network, and valuable business and political contacts.

There are some possible disadvantages to international joint ventures. A major potential drawback, especially in countries that limit foreign companies to minority participation, is the loss of effective managerial control. As a result, you may experience reduced profits, increased operating costs, inferior product quality, exposure to product liability, and environmental litigation and fines. U.S. firms that wish to retain effective managerial control will find this issue important in negotiations with the prospective joint venture partner and the host government.

Because of the complex legal issues frequently raised by international joint venture agreements, you should seek legal advice from qualified U.S. counsel before entering into such an agreement. Many of the export counseling sources discussed in Chapter 4 can help direct you to legal counsel suitable for your needs.

U.S. companies contemplating international joint ventures should consider retaining experienced counsel in the host country as well. You may be at a disadvantage if you rely on your potential joint venture partners to negotiate host government approvals and to advise you on legal issues, because the interests of the prospective partners may not always coincide with your own. Qualified foreign counsel can be very helpful in obtaining government approvals and providing ongoing advice regarding the host country’s intellectual property, tax, labor, corporate, commercial, antitrust, and exchange control laws.

FACT: Companies in a wide variety of industries enter joint ventures as a way of obtaining revenue from overseas operations.

INSIGHT: By forming partnerships or conglomerates, companies can share risk and expertise.

FACT: Domestic and overseas trade shows can help small firms find technology licensing and joint venture opportunities, and U.S. government assistance is also available at many of them.

INSIGHT: German trade shows, both vertical and horizontal, are among the biggest international shows in the world.